This chapter was pretty great. It is inventive and weird (seriously - "pillow teeth tea" - what is that even), but it also expertly deploys well-used tropes and cliches to instantly feel comfortable and familiar. The setting feels like it was adapted from a long-running and extensive fictional canon that we are only getting a brief cross-section of, despite the fact that, near as I can tell, it is mostly original to this work in particular. The closest thing to it is probably the thoroughly worked-out backstory behind the Sentinels of the Multiverse flavor text, and it makes me wonder if there's a similar process at work here.
It made me desperately want to see the Chuubo's Marvelous Wish Granting Engine anime that surely exists in a more just universe (though, this feeling actually reaches its height in the Glass Maker's Dragon campaign, which, if anything, is more brilliant and more frustrating even than the core book).
The only flaw of the setting, and I'd call it more of a nitpick, really, is that it ties itself to a very particular mood and style of play, when the CMWGE is capable of so much more (and that probably explains why, whenever it comes to actually playing Chuubo's, my first instinct is to go with an alternate setting - my storytelling instincts take me away from the setting's fundamental strengths).
The best way I can describe the feel of Chuubo's default setting is "adult nostalgia for childhood media." It's warm-hearted and whimsical and it has a sort of idealized coming-of-age sensibility, but it's also clear that this sensibility is at least a little bit affected. That affect, though, is probably the setting's secret weapon. They're not everywhere, but there are undercurrents of melancholy, mischievousness, and philosophical insight that keep Chuubo's from being too twee.
Or, to put it another way, if you were a parent interested in roleplaying with your children, it would only take a little bit of tweaking to make Town and its environs completely child-safe, but the book itself isn't for them, it's for you. (Not that I can unreservedly recommend Chuubo's as an rpg for children - the system is pretty complex and requires some moderately sophisticated metagaming, but it's also likely that kids are a lot smarter than I give them credit for).
Like I said, though, that's more in the nature of a nitpick. The strength of Town as a setting is that it immediately foregrounds the sort of stories that CMWGE is uniquely suited to tell. You take Chuubo's Epic Fantasy genre and apply it to something like Forgotten Realms, you're going to be telling stories in a dramatically different way than you would if you were playing D&D, but they're still going to be Forgotten Realms D&D-type stories. Practically nothing else out there is doing games where the main plot points are going on a shopping trip with friends or sitting on the docks watching the sunset.
As much as I love the rest of the game, the Setting chapter is definitely the high point of the book, the part that is effortlessly easy to understand, even coming in cold, and which will undoubtedly provide inspiration for gaming experiences scarcely even imagined in other systems.